Question

can you please give feed back to this.. like add something or give a comment about the following posts.

1)

Profit Margin = $LaTeX: \frac{Net\:income}{Sales}$ NetincomeSales

Profit margin is very useful in analyzing the financial health of the firm because it indicates how much money is generated per every dollar in sales. A higher profit margin means there are low expense ratios relative to sales. In other words, it tells us how a company uses its income. When a company has a higher profit margin, it reflects its potential net worth in earnings. It is more likely the company will be able to remain resilient in unexpected down-periods.

I would use the ratio to look and see if I want to do business with another company. If they have a lower percent profit margin, I know the company's high expenses reduce the profit per dollar of income. I might not want to do business with a company that has such high expenses relative to the amount of sales profit they make. Profit margin can also allow me to compare how my company is doing against any competitors. If I run my own company, the profit margin will tell me that I may need to reduce costs, therefore begin outsourcing some jobs.

2)

Cash Ratio = Cash / Current Liabilities

Cash ratio is a measurement of a company’s liquidity which specifically targets the company’s total cash and cash equivalents. The cash ratio uses the company’s most liquid assets which is cash. This ratio is very useful in analyzing the financial health of a company because it measures a company’s ability to pay off the current liabilities with cash and cash equivalents. It is also an indicator of a company’s value which can be crucial in a worst-case scenario when a company is about to go out of business. A company has to be able to pay off their current liabilities or else it can hurt the company for example, by affecting the credit that it offers to customers and suppliers. It also can disrupt the way inventory is managed. The cash ratio is also a great importance to the creditor because it determines if they will be lending to a certain firm based off their ability to pay off current liabilities.

An appropriate cash ratio would be greater than 1. The ideal level of cash ratio would not be lower than 0.5:1. One good example is 1.50. This means that for every dollar of current liability, the company has $1.50 of cash to pay for it. This indicates that the company is able to pay off their current liabilities.

3)

Cash coverage ratio= (EBIT+ Depreciation)/Interest

The cash coverage ratio focuses on the fact that EBIT (Earnings Before Interest and Tax) does not consider the cash available to pay interest. Cash coverage measures how many times cash can cover interest. Depreciation is a noncash expense, so it is added back into EBIT. This formula is useful in analyzing the financial health of the firm because it references the long-term solvency of a firm's ability to cover interest expense with cash.

The way I would asses whether it is at an appropriate level is based on something my Financial Accounting professor once told me. She taught us that, generally, the determinant of which way you want a ratio to go, higher or lower, depends on which number is more desirable, the numerator or the denominator. If the numerator is the desireable, then you want the ratio to be higher. If the denominator is desirable, then you want the ratio to be lower.  For example, in the cash coverage ratio, the desireable number it EBIT plus depreciation. Since the desirable number is the numerator, then we want the ratio to be higher, which is exactly what we want so we can cover interest.

4)

Cash Ratio = Cash / Current Liabilities

The Cash Ratio formula helps identify the capacity of a company to pay off their short-term debts with only cash and/or cash equivalents. Some other things that can be used as cash are demand deposits such as those coming from a savings of checking account. When it comes to cash equivalents, it can be those such as bonds, holdings, and short term investments.

Many creditors tend to look at the cash ratio because it is more restrictive since it is the only one that can pay its short-term debts with cash only (or cash equivalents). This is mainly important because the creditors want to see whether the company can maintain a good cash balance to pay off their debts as they come in.

The cash ratio equation is helpful to both the companies and creditors in various ways. For the companies, it gives them the ability to find out whether they can pay debts with whatever cash they have, and if not, find a way in which they can turn things positively around. For a creditor, it is beneficial for them to see that a company has enough cash to get themselves out of short-term debt because that means they are more than likely to not have much debt in the future.

Answer 1

• Profit Margin :-

Profit margin shows the profitability of the business in relation to sales. Higher profit margin ratio shows higher profitability as well as strong financial health of the business and vice versa.

There are several types of profit margins :-

1. Gross profit - It shows the profit margin after deducting only direct expenses from the sales. Only the expenditures directly connected to trade are considered for Gross profit.
2. Operating profit - Operating profit margin can be obtained by deducting all the operating expenses from the gross profit.
3. Pre-tax profits - All the expenses other than Taxes i.e. all operating as well as non operating expenses are considered to obtain Pre tax profits.
4. Net profit after tax - Pre-tax profits less the tax expenses gives the final net profits after tax. Net profit margin shows the true picture of the profitability of the business as it is derived after considering all the kind of expenditures.

• Cash Ratio :-
• Cash ratio shows the liquidity of the entity as well as capacity of the business to payoff its current debts using cash and cash equivalents.
• Cash ratio is also called as cash asset ratio.
• Cash ratio is a part of Liquidity ratios.
• Cash ratio is the most strict ratio as compared to other liquidity ratios such as current ratio and quick ratio.

• Cash coverage ratio :-
• Cash coverage ratio is a metric used to determine the amount of cash that is generated from routine business to pay off the interest expense for the borrowed money.
• This ratios shows the capability of the business to pay off the interest to the lenders of money.
• To show a great capability of the business to pay off the interest to the lenders, Cash coverage ratio must be substantially higher than 1.

• Cash Ratio :-
• Cash ratio shows the liquidity of the entity as well as capacity of the business to payoff its current debts using cash and cash equivalents.
• Cash ratio is also called as cash asset ratio.
• Cash ratio is a part of Liquidity ratios.
• Cash ratio is the most strict ratio as compared to other liquidity ratios such as current ratio and quick ratio.